At its December 1998 Study Issue Workshop, the City Council prioritized a study on possible first time-homebuyer programs. The idea of a second mortgage is to reduce monthly mortgage payments and thus increase a household’s buying power. The second mortgage fills the gap between the market price and what would be an affordable price for a first-time (no or little equity) buyer. For some first-time buyers in Sunnyvale, a second mortgage can make the difference between being able and unable to buy a home.

If the Council decides to proceed with a first-time homebuyer second mortgage program, there are two primary alternatives available. One is to extend the City’s existing second mortgage shared appreciation program for BMR homes to market homes with availability attached to price and income restrictions. The second alternative is to participate in the County of Santa Clara CASA program.

Recently the County of Santa Clara approved a $300,000 distribution from the Housing Bond Trust Fund to begin a pilot, countywide, second mortgage program for first-time homebuyers. This program, named CASA, pairs a private lender with a public agency lender. The typical borrower might get a 75% first mortgage, a 10% second mortgage (both from the private lender), a 10% third mortgage from the public agency, and make a 5% down payment. The buyer makes monthly payments based only on the first mortgage. Interest and principal on the second and third mortgages are fully deferred until a sale or a refinancing. In lieu of an interest rate established for the second and third mortgages, the borrower shares the appreciation on his home at time of sale or refinancing with the private and public agency lenders.

Both alternatives have the disadvantage that there is a reluctance on the part of homebuyers to enter into a shared appreciation program. The advantage to the County CASA program is that there is some leveraging of the City money through County participation, the administration is handled by an outside agency, and the City can take advantage of countywide advertising. The hope with the County program is that it will eventually be absorbed by the County Housing Trust Fund which will have a much larger pool of money for first-time homeowner programs.

Staff is recommending participation in the County CASA program up to a maximum of $100,000 from Housing Mitigation Funds and approval of Budget Modification No. 8 to the FY 1999/2000 Budget.

At its December 1998 Study Issue Workshop, the City Council prioritized a study on possible first-time homebuyer programs. The Council has subsequently expressed interest in second mortgage programs and other strategies that could be devised. The current prices of Sunnyvale homes make it very difficult for first-time homebuyers to purchase a house in Sunnyvale. This situation has impacted many employers’ ability to attract new employees to the area. In particular, agencies such as the Sunnyvale School District and the Fremont Union High School District are having difficulty attracting new teachers because of the price of housing.

The City’s Below Market Rate program does help to mitigate the problem to a small extent but there is at least a two to three year wait for a BMR home. The BMR program serves households in the $40,000 - $65,000 income range which is approximately 80% of median income for the County.

The Santa Clara County’s Mortgage Credit Certificate program (MCC) used to be a great resource to increase households’ ability to purchase a home and even allow lower income households to buy a BMR unit. The MCC program allowed first time homebuyers a tax credit of up to 20% of their mortgage payment. However, the County Mortgage Credit Certificate Program has been cut back severely over the past four years. Whereas in the four years from 1991 through 1994, the County issued an average of 1,415 MCCs annually, in the four years from 1995 through 1998, the County issued an average of only 292 MCCs annually.

In 1997/98 only 21 MCCs were issued in Sunnyvale. One reason for the abrupt change in issuances was a change in administrative procedures at the State level for allocating local tax-exempt authority. A second reason is the growing viability of apartment development and a resulting and steadily increasing demand for multi-family, tax exempt bond issues. The multi-family bonds compete with single-family bonds and MCCs for the federally capped tax-exempt authority that can be used in California.

2.3C.1b of the Housing and Community Revitalization Sub-Element states:

As housing prices continue to escalate, homeownership becomes more difficult for median income households. There are two barriers to purchasing a home for a first-time homebuyer. One is the price of the house and secondly, even if the household has sufficient income to support a mortgage, they do not have the down payment. The median house price in Sunnyvale currently exceeds $300,000. To afford a home at this price, a household at median income ($82,600) would have to have a down payment of at least $30,000.

The idea of a second mortgage program is to reduce monthly first mortgage payments and thus increase a household’s buying power—something that is very important to first-time buyers in Sunnyvale. The second mortgage fills the gap between the market price and what would be an affordable price for a first-time (little or no equity) buyer. For first-time buyers in Sunnyvale, a no interest second mortgage can make the difference between being able and unable to buy a home.

The County of Santa Clara has also recently been examining the potential of second mortgage programs. To determine the guidelines that might be used the County requested data from the Center for Urban Analysis regarding the number of homes that have sold for $300,000 or less in the County. $300,000 was used as the limit because it was decided that homes over $300,000 would be too expensive even with a second mortgage program, for moderate-income first-time homebuyers. The data was available for 1998 so it does not include this year’s surge in housing prices. The data showed that there were 169 existing (as opposed to new construction) single-family houses in Sunnyvale that sold for less that $300,000 and 280 existing condos or townhouses sold at less than $300,000. Of these, 75% or 336 homes and condos sold for less than $270,000 and 24% or 122 houses and condos sold for less than $220,000. There were no new single family homes or condominiums at less than $300,000.

Currently, five cities in the County are offering some type of second mortgage assistance to first-time homebuyers. These include Campbell, San José, Santa Clara, Morgan Hill and Sunnyvale. Sunnyvale’s program was approved in 1994 for lower income buyers in the BMR program. The maximum loan was $20,000 for a 15-year term. The loan would be interest free for five years and principal repayments would begin in year six. The City would participate in the appreciation when the loan is paid off, or if the unit is sold, transferred or refinanced. The City’s share would be limited to the amount the City would have received if the loan had been a 5% deferred interest loan. However, no second mortgages have been issued under this program because most people who qualify for the second mortgage program have not been able to secure a first mortgage.

The City of Santa Clara program provides a deferred payment second mortgage program in the form of gap financing to eligible first-time homebuyers. The maximum home price is $250,000. The buyer must provide a 5% down payment and the second mortgage is a maximum of $30,000. The second mortgage is from redevelopment tax increment. It is a 15-year shared appreciation mortgage. There is a five-year deferral of any payments and then principal payments only for 10 years. At the end of the term there is a proportional share of the appreciation due. In the five years of the program, 169 families have participated and Santa Clara has made available $5,000,000 in funds for the program. Most of the buyers were between 80% and 110% of median income.

The City of San Jose has two second mortgage programs. One program used $1,230,000 of HOME funds for deferred City loans in the GRAIL project, a new construction project built by a non-profit. A more recent program is a second mortgage program that is restricted to teachers employed in San Jose purchasing homes under $240,000 and are first-time home buyers earning at or below 80% of median income. San Jose has allocated $2,000,000 in Redevelopment Tax Increment to provide down-payment assistance loans of up to $7,200. These are personal unsecured loans with a 0% interest rate, repayable in 30 years or upon refinancing or transfer of the property or if the homeowner no longer is a teacher in San Jose. There is also an equity-share provision if the home is not sold to another eligible buyer. The first mortgage is a first deed of trust provided by an approved private lender. The gap or second mortgage can be up to $40,800. It is a deferred payment loan from the California Rural Home Mortgage Finance Authority (Cal Rural). Cal Rural is using $17 million in tax exempt bonds to finance these loans. There are no payments for 10 years but the loan accrues simple interest at 6%. The loan is amortized in years 11-30 at a 6% interest rate.

Through the County Housing Bond Advisory Committee (HBAC) a number of second mortgage programs have been examined for applicability county-wide. These include the Community Assisted Shared Appreciation (CASA) program which is currently operating in Campbell; the ACCESS second mortgage loan program being offered by the California Rural Home Mortgage Finance Authority and in place in San Jose; and Fannie Mae’s Down Payment Assistance Investment Note.

Fannie Mae’s Investment Note Program did not fit well with the income levels and housing prices in Santa Clara County. The ACCESS representative also felt that with the variance between housing prices and the income levels targeted the program could not successfully operate compared to those areas of the state where ACCESS was successfully operating.

In reviewing the options available, the HBAC Subcommittee established a number of objectives and outlined the parameters of a desirable second mortgage program. Following are the Objectives and Parameters adopted by the HBAC for a 2^nd Mortgage Program:

These criteria were then sent to ACCESS and CASA to determine whether they could adapt their programs to fit Santa Clara County’s needs. The HBAC received two responses from CASA (none from ACCESS) and finalized a set of objectives and parameters for the program.

CASA Program

In the CASA program, Northbay Ecumenical Homes (NEH) pairs a private lender with a public agency lender. The typical borrower might get a 75% first mortgage, a 10% second mortgage (both from the private lender), a 10% third mortgage from the public agency lender, and make a 5% down payment.

The buyer makes monthly payments based only on the first mortgage. Interest and principal on the second and third mortgages are fully deferred until a sale or a refinancing. In lieu of an interest rate established for the second and third mortgages at the outset, the borrower shares the appreciation on his home with the private and public agency lenders and NEH. The appreciation to be shared equals the initial purchase price of the house minus the final sales price (or the appraised value in the case of a refinancing). Of that appreciation, 40 percent is retained by the borrower and 60 percent is shared between the private lender, the public agency lender, and NEH. If the parameters recommended by the HBAC are used, the CASA loan is limited to $40,000. Half of those funds ($20,000) are put up by the private lender and half by the public agency or agencies. If the County establishes a CASA program with NEH based on the above parameters, the Housing Bond Trust Fund (HBTF) would lend a maximum of $20,000 to each first-time CASA buyer. If Sunnyvale decided to participate in the program, for every Sunnyvale buyer, Sunnyvale would contribute towards the $20,000 on a ratio of 2/1 or approximately $13,000 per loan. That means that for every $100,000 put into CASA loan funds by Sunnyvale, a minimum of seven loans will be made dependent on the County having sufficient matching funds. If, on average, the buyers borrow less than $40,000 in their second and third mortgages, the number of loans per $100,000 of Sunnyvale funds will increase. On sale or refinance, the City would take its principal and its share in the appreciation and would recycle the City funds back into the lending pool to make additional loans to buyers in Sunnyvale. The County dollars would also be redistributed for new loans based on the distribution formula in place at the time.

NEH operates the CASA program from two revenue sources:

An up front 3 percent fee (paid at close of escrow by the borrower) covers program development, loan underwriting, and the closing of loans. This fee is a revenue offset paid to NEH for producing the CASA program and a fee for service for marketing the program (to agencies, lenders, and realtors), for training participants.

When the borrower pays off the first mortgage, NEH gets 10 percent of the gross appreciation. That pays NEH for annual reports, handling calls from borrowers, handling loan payoffs, and dealing with actual or potential problems, such as defaults and workouts.

The envisioned program entices a lending bank seeking Community Reinvestment Act credits to match funds put up by a local governmental agency (or agencies) to make second and third mortgages covering 20 percent of the purchase price of a home. The second and third loans are "silent," due on sale. Instead of establishing an interest rate for the second and third mortgages, the lending bank and the local governmental agency share with the buyer/borrower in the home’s appreciation at the time of sale or refinance.

The County has approved a $300,000 distribution from the Housing Bond Trust Fund to begin a pilot, county-wide, second mortgage program for first-time homebuyers. Any city that wishes to take advantage of the County CASA program would enter into an agreement with the County whereby the City agrees to provide funds for the program, the County agrees to sequester such funds for second mortgages in the funding city, and the City and County agree to share, by formula, the appreciation revenues from the third trust deed. The County will leverage participating City contributions by matching the contribution at no less than 20 percent County/80 percent City and no more than 50/50 percent. The exact level of the match will be determined at a later date and will be the same for all participating cities.

If the Council decides to proceed with a first-time homebuyer second mortgage program, there are two primary alternatives available. One is to extend the City’s existing program beyond the BMR homes similar to the Santa Clara program. The second alternative is to participate in the County program. Both programs have the disadvantage that there is reluctance on the part of homebuyers to enter into a shared appreciation program. However, if it is the only alternative to enter into homeownership then it might be a barrier people can overcome. This does not seem to have been an impediment to the success of Santa Clara’s program. The second alternative is to participate in the County program. The advantages to this are that there is some leveraging of the City money, the administration is handled by an outside agency, and the City can take advantage of county-wide advertising. The hope with the County program as well, is that it will eventually be absorbed by the Housing Trust Fund that will have a much larger pool of money for leveraging.

If the City instituted its own program, similar to Santa Clara’s, approximately three second mortgages could be issued for $100,000. Assuming that these mortgages will be paid off in a relatively short period of time the funds would be recycled for additional mortgages in the future. Participation in the County CASA program would have much higher leverage of City dollars. The County CASA second mortgage program involves City, County and private sector funds. If the City contributes $100,000 to the program, it is anticipated that at least $300,000 of second mortgages should be able to be issued combining the three sources of funds.

Current (Decrease) Revised

Project 814700

BMR Second Mortgage Program $ 64,489 $ 100,000 $ 164,489

Housing Mitigation Reserve $2,323,767 $ (100,000) $2,223,767

This report was reviewed by the Housing and Human Services Commission at its meeting of September 22, 1999. HHSC recommended approval of staff recommendation.

1. Approve participation in the County CASA program up to a maximum of $100,000 from Housing Mitigation Funds and have the City Manager enter into a cooperative Agreement with the County for the CASA program.
2. Approve Budget Modification No. 8 to the FY 1999/2000 Budget.
3. Approve a Sunnyvale Second Mortgage Program similar to the program designed by the City of Santa Clara and amend the Budget Modification to $300,000 from the Housing Mitigation Fund.
4. Decide not to implement a new Second Mortgage Program.

Staff recommends approval of Alternative 1 and 2.

Prepared by:

Dyane Matas
Housing & Neighborhood Preservation Officer

Reviewed by:

David S. Boesch, Jr.
Director, Community Development

Approved by:

Robert S. LaSala
City Manager

1. Description of CASA Program
2. Table 4: 1998 New Home Sales, $300,000 or Less
3. Table 5: 1998 Existing Home Sales, $300,000 or Less